Restricted Stock Voting Rights: Everything You Need to Know
In employee-owned companies, restricted stock voting rights are granted to or withheld from company employees.3 min read
In employee-owned companies, restricted stock voting rights are granted to or withheld from company employees. Whether employees holding restricted stock have voting rights depends on the type of restricted stock they hold and the state laws where the company operates.
Restricted stock describes company shares that are sold and bought under restrictions. In employee-owned companies, restricted stock usually refers to shares given to employees or shares that employees have the right to purchase, but which they can't take possession of until a later time when certain conditions have been met.
Often employees will gain access to shares after working for a company for a certain number of years or when they have met individual performance goals. If the employee doesn't meet the terms for the restrictions to be lifted, they will forfeit the shares. Depending on the company's vesting schedule, restricted stock could vest gradually or all at once.
Restricted stock might or might not provide employees with dividends or voting rights. Voting right rules and dividend laws vary state by state. Depending on whether state law permits it, a company's articles of incorporation can allow voting rights and/or dividends on unvested shares.
Advantages and Disadvantages of Restricted Stock
Advantages of restricted stock:
- Shareholders can have dividends or voting rights at the company's discretion.
- Even if the share price goes down, restricted stock continues to carry some value for employees.
- Since awards carry value regardless of whether the share price decreases, restricted stock shares carry similar benefits as and are less complicated than options.
Disadvantages of restricted stock:
- Restrictions could make it less likely for an employee to own stock. If an employee were looking to buy shares, especially if they weren't purchased at a price reduction, restricted stock may not seem like a very attractive buy.
- If the company's stock does not gain the worth that the company intended, restricted stock won't have much value.
- Restricted stock can carry some financial risks.
Restricted Stock Units
Restricted stock units (RSUs) are commonly issued by employers instead of restricted shares. Though similar to restricted stock, RSUs have additional features that, in some ways, make them preferable to stock.
RSUs are essentially an employer's promise to pay the employee a specified number of shares when the employee has completed a vesting schedule. These units have no real value until vesting is complete. RSUs follow vesting schedules and don't directly pay dividends; however, they could pay the equivalent of a dividend toward withholding taxes or be reinvested into more shares.
RSUs are closely related to restricted stock and have many of the same advantages and disadvantages. Key advantages RSUs have over restricted stock include:
- Potentially lower taxes.
- Deferral of share issuance. Employers are able to issue RSUs without diluting the company's share base.
- Low cost. The administrative cost of RSUs is lower since there aren't any shares to hold, record, or track.
- Tax deferral. Taxation can be deferred beyond the vesting date if the company delays issuing shares to employees.
- Reduced foreign tax hassle. Issuing RSUs to non-U.S. employees can make taxation easier given differences in how and when stock is taxed.
Not all of the differences between RSUs and restricted stock are positive. RSUs don't have:
- Voting rights until shares have vested and are formally issued.
- Dividends, as no shares are actually in use.
Restricted Stock Awards
Restricted stock awards are often used as a means of paying employees in lieu of stock options, which are losing popularity. A key reason why restricted stock is preferred over options is the reduced charge to income that restricted stock awards provide.
Restricted stock awards, like RSUs, allow companies to reward employees by awarding stock on top of compensation. Restricted stock will vest after a certain period of time; however, the employer usually stipulates that the stock will not vest if the employee leaves the company voluntarily, is fired, or doesn't meet specified performance objectives.
Big differences exist between restricted stock awards and RSUs. Mainly, restricted stock awards carry voting rights effective immediately since the employee is the legal owner of the stock from the moment the stock is granted. RSUs are representative of the right to stock rather than the stock ownership. In addition, restricted stock awards can't be cashed in, which is sometimes possible with RSUs.
If you need help with restricted stock voting rights, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.